Credit Acceptance Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Credit Acceptance finances vehicle purchases through a nationwide dealer network, primarily for consumers with impaired or limited credit histories. It operates one reportable segment and uses Portfolio and Purchase programs.
Financial and operating results
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $969.2 million | $825.3 million | +17.4% |
| Income before taxes | $531.2 million | $474.5 million | +11.9% |
| Net income | $332.8 million | $299.7 million | +11.0% |
| Diluted EPS | $16.31 | $14.28 | +14.2% |
| Operating cash flow | $507.2 million | $404.2 million | +$103.0 million |
- Finance charges were $874.3 million, up 19.7%, mainly on a larger average loan portfolio. The average net loans receivable balance increased to $3.534 billion from $2.830 billion, while portfolio yield fell to 24.7% from 25.8%.
- Premiums earned declined 10.8% to $43.0 million, reflecting a smaller reinsurance portfolio; other income rose 11.4% to $51.9 million.
- The reported net margin was approximately 34.3%, versus 36.3% in 2015. Credit-loss provision more than doubled to $90.2 million from $41.5 million; interest expense increased 28.6% to $97.7 million.
- Net loans receivable were $3.887 billion, with a $320.4 million allowance for credit losses, at year-end. Total assets were $4.218 billion and shareholders’ equity was $1.174 billion.
- Total debt carrying amount was $2.604 billion, up from $2.068 billion; funded debt to equity was 2.2:1. Cash and cash equivalents were $14.6 million, while unused and available credit lines were $948.0 million. Restricted cash and securities were $270.0 million and are not equivalent to unrestricted cash.
- Cash flow from investing activities was negative $935.5 million, principally reflecting loan funding; financing activities provided $436.6 million. The company repurchased $121.7 million of stock and paid no dividends.
Fourth-quarter results
Q4 2016 revenue was $256.2 million, pretax income $141.6 million, net income $87.6 million and diluted EPS $4.33. For Q4 2015, the corresponding figures were $217.8 million, $125.9 million, $80.0 million and $3.84.
Material changes and management commentary
- Consumer Loan assignment volume increased 10.9% by units and 21.6% by dollar volume. Active Dealers grew 16.2%, but average volume per active Dealer fell 4.6%; unit volume declined year over year in Q4.
- The Purchase Program expanded to 21.4% of assigned units from 12.6% in 2015, and to 28.6% of assignment dollar volume from 17.2%.
- Management attributed higher earnings principally to portfolio growth, partially offset by weaker loan performance and lower yields. The 2016 credit-loss provision was predominantly for Dealer Loans ($87.3 million).
- In Q4, the company enhanced its collection forecasting methodology. The change reduced forecast net cash flows by $1.8 million and did not materially affect credit-loss provision or net income. Full-year forecast changes reduced net cash flows by $20.1 million: a $35.4 million decline for Dealer Loans, partly offset by a $15.3 million increase for Purchased Loans.
- Management provided no numeric earnings or volume guidance. It said anticipated operating cash flows and financing alternatives should be sufficient for debt maturities and operations, while warning that reduced access to funding could materially impair liquidity and operations.
- Three Term ABS financings totaling approximately $1.085 billion were completed in 2016, primarily to repay debt. The company also extended certain revolving facilities; borrowing spreads increased on two warehouse facilities.
Risks, contingencies and unusual items
- Credit results depend on estimates of future collections, which affect revenue recognition and credit-loss allowances. A 1% decline in forecast future net cash flows on loans at year-end would have reduced 2016 net income by approximately $15.6 million. Recent loan vintages remain less seasoned and forecasts less certain.
- Substantial debt, debt covenants, refinancing availability and variable interest rates are key risks. The filing reports covenant compliance at year-end. A maximum modeled rate increase on floating-rate Term ABS 2016-1 would reduce annual after-tax earnings by approximately $10.4 million, assuming debt levels remain constant.
- The company disclosed inquiries or subpoenas involving the FTC (GPS starter interrupters), Maryland repossession and sale practices, New York loan origination and collections, Massachusetts non-prime auto loans, and the U.S. Department of Justice’s subprime auto finance and securitization inquiry. It is cooperating and cannot estimate possible losses or outcomes.
- A lawsuit by Westlake Services and Nowcom alleges attempted monopolization of the indirect-financing profit-sharing market and seeks injunctive relief and unspecified damages. The company intends to defend itself; loss cannot be estimated.
- Additional risks include consumer-protection and fair-lending regulation, economic downturns and used-vehicle values, competition, litigation, cybersecurity and technology dependencies, and dealer or service-provider disruption.
- The company stated that adoption of the expected-credit-loss standard (CECL) was preliminarily expected to have a material impact on its financial statements and disclosures.
Most important facts for investors to verify
- Subsequent performance of 2015–2016 loan vintages and whether forecast collection rates, credit provisions and actual recoveries stabilize or deteriorate.
- How portfolio growth, lower yields, rising credit-loss provisions and funding costs affect returns and earnings quality.
- Availability, cost and maturity profile of warehouse, revolving and securitization funding, including compliance with related covenants.
- Developments and potential financial or operational effects of the FTC, state attorney general and DOJ inquiries, and the Westlake litigation.
- The eventual quantified effect and implementation timing of CECL; management’s filing provides no clear quantified estimate.